INVESTMENT GRADE CREDIT FUND; PIMCO FUNDS: GLOBAL INVESTORS SERIES PLC, INCOME FUND; PIMCO FUNDS: GLOBAL INVESTORS SERIES PLC, PIMCO CREDIT ABSOLUTE RETURN FUND; PIMCO FUNDS: GLOBAL INVESTORS SERIES PLC, UNCONSTRAINED BOND FUND; PIMCO FUNDS: PIMCO COMMODITIESPLUS STRATEGY FUND; PIMCO FUNDS: PIMCO COMMODITY REAL RETURN STRATEGY FUND ; PIMCO FUNDS: PIMCO CREDIT ABSOLUTE RETURN FUND; PIMCO FUNDS: PIMCO DIVERSIFIED INCOME FUND; PIMCO FUNDS: PIMCO FLOATING INCOME FUND; PIMCO FUNDS: PIMCO FOREIGN BOND FUND (UNHEDGED); PIMCO FUNDS: PIMCO GLOBAL ADVANTAGE STRATEGY BOND FUND; PIMCO FUNDS: PIMCO GLOBAL BOND FUND (UNHEDGED); PIMCO FUNDS: PIMCO INCOME FUND; PIMCO FUNDS: PIMCO INTERNATIONAL STOCKSPLUS AR STRATEGY FUND (U.S. DOLLAR- HEDGED); PIMCO FUNDS: PIMCO INVESTMENT GRADE CORPORATE BOND FUND; PIMCO FUNDS: PIMCO LOW DURATION FUND; PIMCO FUNDS: PIMCO LOW DURATION FUND II; PIMCO FUNDS: PIMCO LOW DURATION FUND III; PIMCO FUNDS: PIMCO REAL RETURN FUND; PIMCO FUNDS: PIMCO SHORT-TERM FUND; PIMCO FUNDS: PIMCO TOTAL RETURN FUND; PIMCO FUNDS: PIMCO UNCONSTRAINED BOND FUND; PIMCO FUNDS: PIMCO WORLDWIDE FUNDAMENTAL ADVANTAGE AR STRATEGY FUND; PIMCO FUNDS: PRIVATE ACCOUNT PORTFOLIO SERIES EMERGING MARKETS PORTFOLIO; PIMCO FUNDS: PRIVATE ACCOUNT
PORTFOLIO SERIES INTERNATIONAL PORTFOLIO; PIMCO FUNDS: PRIVATE ACCOUNT PORTFOLIO SERIES MORTGAGE PORTFOLIO; PIMCO FUNDS: PRIVATE ACCOUNT PORTFOLIO SERIES SHORT-TERM PORTFOLIO; PIMCO FUNDS: PRIVATE ACCOUNT PORTFOLIO SERIES U.S. GOVERNMENT SECTOR PORTFOLIO; PIMCO MULTI-SECTOR STRATEGY FUND LTD.; PIMCO OFFSHORE FUNDS - PIMCO ABSOLUTE RETURN STRATEGY IV EFUND; PIMCO VARIABLE INSURANCE TRUST: PIMCO GLOBAL ADVANTAGE STRATEGY BOND PORTFOLIO; PIMCO VARIABLE INSURANCE TRUST: PIMCO GLOBAL BOND PORTFOLIO (UNHEDGED); PIMCO VARIABLE INSURANCE TRUST: PIMCO LOW DURATION PORTFOLIO; CREF BOND MARKET ACCOUNT; CREF SOCIAL CHOICE ACCOUNT; TIAA GLOBAL PUBLIC INVESTMENTS, MBS LLC; TIAA-CREF BOND FUND; TIAA-CREF BOND PLUS FUND; TIAA-CREF LIFE INSURANCE COMPANY; PRUDENTIAL BANK & TRUST, FSB; PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY; THE GIBRALTAR LIFE INSURANCE COMPANY, LTD.; THE PRUDENTIAL SERIES FUND; LIICA RE II, INC.; MONUMENTAL LIFE INSURANCE COMPANY MODIFIED SEPARATE ACCOUNT; TRANSAMERICA LIFE INSURANCE COMPANY; TRANSAMERICA PREMIER LIFE INSURANCE COMPANY; KORE ADVISORS LP; and SEALINK FUNDING LIMITED, derivatively, on behalf of the Trusts Identified in Exhibit 1, Plaintiffs,
-against- CITIBANK N.A., Defendant, -andthe Trusts Identified in Exhibit 1 Nominal Defendants.
TABLE OF CONTENTS Page I. NATURE AND SUMMARY OF THE ACTION... 1 II. PARTIES... 9 A. Plaintiffs... 9 1. AEGON... 9 2. Kore... 10 3. PIMCO... 10 4. Prudential... 15 5. Sealink... 16 6. TIAA... 16 B. Defendants... 17 1. Citibank... 17 2. The Nominal Defendant Trusts... 18 III. OVERVIEW OF THE TRUSTS... 19 IV. JURISDICTION AND VENUE... 20 V. COMPLIANCE WITH THE NO ACTION CLAUSE IS EXCUSED... 20 VI. DERIVATIVE AND DEMAND EXCUSED ALLEGATIONS... 21 VII. BACKGROUND - THE TRUSTEE S ROLE AS GATEKEEPER IN THE SECURITIZATION PROCESS... 24 VIII. CITIBANK S CONTRACTUAL OBLIGATIONS... 26 A. The Mortgage Loan Purchase And Sale Agreement... 27 B. The Pooling And Servicing Agreements... 29 1. Citibank s Duties And Obligations Under The PSAs... 29 a) Duty To Provide Notice Of Breaches And To Enforce Putback Rights...30 b) Citibank s Duties Regarding The Servicers...31 -i-
c) Duties Upon Knowledge Of An Event Of Default...32 2. The Servicers Duties And Obligations Under The PSAs... 33 a) Duty To Provide Notice Of Breaches And To Enforce Putback Rights...33 b) Duty To Perform Prudent And Customary Servicing Practices...34 c) Duty To Perform Prudent Foreclosure Practices...35 d) Duty To Perform Prudent Servicing Advances...35 C. The Indentures And Sale Servicing Agreements... 37 IX. THE TRUSTS SUFFERED FROM PERVASIVE BREACHES OF REPRESENTATIONS AND WARRANTIES BY THE SELLERS... 39 A. High Default Rates Of The Mortgage Loans And Plummeting Credit Ratings Are Indicative Of Massive Seller Breaches... 40 B. The Systemic Disregard Of Underwriting Standards Was Pervasive During The Relevant Period... 41 C. There Is Evidence Of Widespread Breaches Of Representations And Warranties By The Specific Originators That Sold Loans To The Trusts... 44 1. American Home... 44 2. WaMu And Long Beach... 46 3. SunTrust... 49 4. Wells Fargo... 51 D. The Systemic Disregard Of Prudent Securitization Standards Was Pervasive During The Relevant Period... 53 E. There Is Evidence Of Widespread Breaches Of Representations And Warranties By The Specific Sponsors Of The Trusts... 54 1. WaMu... 54 2. Lehman... 56 3. Goldman Sachs... 58 -ii-
X. CITIBANK KNEW THAT THE TRUSTS WERE FILLED WITH DEFECTIVE LOANS... 61 A. The Trusts Poor Performance... 61 B. Credit Rating Downgrades Further Demonstrate The Sellers Problems... 64 C. Citibank Discovered Widespread Seller Breaches Of Representations And Warranties In Its Capacity As Servicer... 65 D. Citibank Was Named In RMBS Litigation Involving Common Loan Sellers Systemic Abandonment Of Underwriting Guidelines... 66 E. Citibank And Its Responsible Officers Received Written Notice From Certificateholders And Monoline Insurers Of Pervasive And Systemic Seller Breaches... 68 F. Citibank Knew Of Pervasive And Systemic Seller Breaches As A Result Of RMBS Litigation Brought By Investors And Government Agencies On Deals In Which It Serves As Trustee... 73 G. Citibank Was Named In RMBS Litigation And Has Agreed To Settle RMBS Claims Involving Common Loan Sellers Systemic Abandonment Of Underwriting Guidelines... 77 XI. THE TRUSTS ALSO SUFFERED FROM PERVASIVE SERVICER VIOLATIONS... 79 A. The Servicers Failed To Give Notice Of Seller Breaches Of Representations And Warranties And Enforce The Sellers Repurchase Obligations... 80 B. The Servicers Have Violated Their Prudent Servicing Obligations... 83 C. The Servicers Have Violated Their Foreclosure Obligations... 86 D. The Servicers Have Violated Their Modification Obligations... 91 E. The Servicers Have Abused Their Servicing Advances Obligations... 92 XII. CITIBANK HAS KNOWN OF SERVICER VIOLATIONS PLAGUING THE TRUSTS... 94 A. Citibank Itself Was Involved In Government Enforcement Actions And Litigation Stemming From The Servicers Violations... 94 B. Citibank And Its Responsible Officers Received Written Notice From Certificateholders Of Pervasive And Systemic Servicer Breaches... 97 C. Citibank Had Knowledge Of The Servicers Failures Through The Monthly Servicer And Remittance Reports... 98 -iii-
XIII. CITIBANK FAILED TO DISCHARGE ITS CRITICAL PRE- AND POST-DEFAULT DUTIES... 98 A. Failure To Enforce The Trusts Repurchase Rights... 99 B. Failure To Provide Notice To The Servicers Of Events Of Default... 99 C. Failure To Act Prudently After The Uncured Events Of Default... 99 D. Failure To Provide Notice To The Certificateholders Of The Uncured Events Of Default... 100 XIV. XV. CITIBANK FAILED TO PROTECT THE TRUSTS FOLLOWING THE INSOLVENCY OF CERTAIN SPONSORS... 101 CITIBANK FAILED TO PROTECT THE TRUSTS DUE TO ITS CONFLICTS OF INTEREST... 103 A. Citibank Was Economically Beholden To The Mortgage Loan Sellers... 103 B. Citibank Was Engaged In The Same Wrongful Servicing Activities... 104 C. Citibank Originated And Sponsored Defective Loans... 106 D. Citibank Refused To Discharge Its Duties In Order To Preserve Profits... 110 XVI. CAUSATION... 112 XVII. DAMAGES... 113 XVIII. CAUSES OF ACTION... 113 FIRST CAUSE OF ACTION BREACH OF CONTRACT (In The Right Of The Trustee And On Behalf Of The Trusts Against Citibank)... 113 SECOND CAUSE OF ACTION VIOLATION OF THE TRUST INDENTURE ACT OF 1939, 53 STAT. 1171 (In The Right Of The Trustee And On Behalf Of The Trusts Against Citibank)... 121 THIRD CAUSE OF ACTION NEGLIGENCE - BREACH OF PRE-DEFAULT DUTY OF INDEPENDENCE (In The Right Of The Trustee And On Behalf Of The Trusts Against Citibank)... 124 FOURTH CAUSE OF ACTION BREACH OF FIDUCIARY DUTY DUTY OF CARE (In The Right Of The Trustee And On Behalf Of The Trusts Against Citibank)... 126 FIFTH CAUSE OF ACTION NEGLIGENCE DUTY OF CARE (In The Right Of The Trustee And On Behalf Of The Trusts Against Citibank)... 128 -iv-
SIXTH CAUSE OF ACTION BREACH OF FIDUCIARY DUTY BREACH OF POST-DEFAULT DUTY OF INDEPENDENCE (In The Right Of The Trustee And On Behalf Of The Trusts Against Citibank)... 130 XIX. CLASS ACTION ALLEGATIONS... 132 XX. RELIEF REQUESTED... 134 XXI. JURY DEMAND... 135 -v-
Plaintiffs AEGON (as defined herein); Kore Advisors, LP ( Kore ); PIMCO (as defined herein); Prudential (as defined herein); Sealink Funding Limited ( Sealink ); and TIAA (as defined herein) (collectively, Plaintiffs ) by and through their undersigned attorneys, hereby bring this derivative complaint (the Complaint ) in the right of the trustee and on behalf of and for the benefit of the residential mortgage-backed securities ( RMBS ) Trusts listed in Exhibit 1 ( Trusts ), against Citibank N.A. ( Citibank or the Trustee ), the Trustee for the Trusts to recover losses sustained by the Trusts as a result of Citibank s wrongful conduct. Alternatively, Plaintiffs bring this action on their own behalf and on behalf of a class of all current owners of certificates in the Trusts (the Class ) to recover for the losses directly suffered by Plaintiffs and the Class as a result of Citibank s wrongful conduct. I. NATURE AND SUMMARY OF THE ACTION 1. Defendant Citibank is a nationally chartered banking association that is the Trustee for over a hundred RMBS trusts originally securitized by more than $69 billion of residential mortgage loans. Among them are the Trusts at issue in this action: twenty-seven private-label RMBS Trusts securitized between 2004 and 2007 collateralized with loans worth more than $17.4 billion at the time of securitization. Citibank, as Trustee, is the sole gatekeeper for the protection of the Trusts and their beneficial certificateholders (the Certificateholders ), and must at all times act in the best interests of the Trusts. As alleged herein, Citibank failed to discharge its duties and obligations to protect the Trusts. Instead, to protect its own business interests, Citibank ignored pervasive and systemic deficiencies in the underlying loan pools and the servicing of those loans and unreasonably refused to take any action. This derivative action -1-
seeks to recover billions of dollars in damages to the Trusts caused by Citibank s abdication of responsibility. 1 2. RMBS trusts are created to facilitate the securitization and sale of residential mortgage loans to investors. The trust s assets consist entirely of the underlying loans, and the principal and interest payments on the loans are passed through to the certificateholders. Between 2004 and 2008, a handful of large investment banks including Citibank dominated the RMBS market and controlled the process from beginning to end. These banks act as sponsors of the RMBS, acquiring the mortgage loans from originators, who often were affiliates of the sponsors, or beholden to them through warehouse lending or other financial arrangements. Once the loans are originated, acquired and selected for securitization, the sponsor creates a trust where the loans are deposited for the benefit of the Certificateholders. The sponsor also hand-picks the servicer, often an affiliate of the sponsor or originator, to collect payments on the loans. Finally, a select number of these same banks that originate, securitize and service RMBS also act as trustees on other sponsor s deals. 3. To ensure the quality of the RMBS and the underlying loans, the Trust documents generally include representations and warranties from the loan sellers attesting to the quality and characteristics of the mortgages as well as an agreement to cure, substitute, or repurchase mortgages that do not comply with those representations and warranties. Because the risk of non-payment or default on the loans is passed through to investors, other than these representations and warranties, the large investment banks and other players in the mortgage 1 This complaint does not allege in any way that the Trustees were or are burdened by conflicts in connection with their negotiation, evaluation, or acceptance of any RMBS settlement, including the $8.5 billion settlement with Bank of America/Countrywide, the $4.5 billion settlement with JPMorgan, or the $1.125 billion settlement with Citibank. -2-
securitization industry have no skin in the game once the RMBS are sold to certificateholders. Instead, their profits are principally derived from the spread between the cost to originate or purchase loans, how much they can sell them to investors once packaged as securities, as well as various servicing-related income. Accordingly, volume became the focus, and the quality of the loans was disregarded. 4. The fundamental role of a trustee in an RMBS securitization is to ensure that there is at least one independent party, free from any conflicting self-interest, to protect the trust corpus. Certificateholders have no access to the underlying loan files and other documents necessary to confirm compliance with the representations and warranties, cannot monitor the servicers conduct and performance, cannot act independently to enforce the trusts contractual rights, and must rely on the trustee to protect their interests. Citibank, as Trustee, was the sole contractual party in the Trusts securitization process intended to be independent of the investment banks that sponsored the securitization, the lenders that originated the loans, and the servicers that were often affiliated with either the sponsors or lenders, or both. Certificateholders must rely on the Trustee to protect the rights and interests of the trusts. 5. Citibank knew that the pools of loans backing the Trusts were filled with defective mortgage loans. The abysmal performance of the Trust collateral including spiraling defaults, delinquencies and foreclosures is outlined on monthly remittance reports that Citibank, as Trustee, publishes and publicly files with the government. The monthly remittance reports detail how, by January 2009, the Trusts had suffered collateral losses exceeding $389 million. The Trusts average delinquency rate was over 13%. Moreover, five Trusts had delinquency rates exceeding 30%. By January 2011, the Trusts total losses had increased more -3-
than three-fold to $1.4 billion. By December 2009, nearly all of the securities issued by the Trusts had experienced multiple downgrades, with most reduced to junk status. 6. A steady stream of public disclosures has linked the abject performance of the Trusts to systemic abandonment of underwriting guidelines, and the deficient and often fraudulent securitization practices of the sponsors. Highly publicized government investigations, reports and enforcement actions; high-profile RMBS litigation by government agencies, federal banks, and institutional investors; and claims and litigation instituted by monoline insurers have repeatedly noted the pervasive disregard and systemic abandonment of underwriting guidelines in the years leading up to the financial crisis. Voluminous complaints in these proceedings detail gross misstatements in the Trust documents of key metrics concerning the quality of the underlying loan pools, including loan-to-value ratios ( LTVs ), owner occupancy status, and borrower credit scores as well as the completeness of the loan files themselves. 7. Forensic and loan level reviews have demonstrated staggering levels of breaches of representations and warranties by the sellers of the securitized mortgage loans. In particular, forensic reviews commissioned by government agencies and federal banks in connection with RMBS trusts to which Citibank serves either as trustee or servicer have found pervasive and systemic breaches of representations and warranties by major originators and sponsors to the Trusts (such as Washington Mutual ( WaMu ), Lehman Brothers Holdings Inc. ( Lehman ), Wells Fargo Bank ( Wells Fargo ), Goldman Sachs, and American Home Mortgage Corp. ( American Home ). In one such action, the Federal Housing and Finance Agency s ( FHFA ) forensic analysis found that two of the Trusts here at issue had LTV ratios greater than 100% when no such loans were supposed to be included in the pool, and that non-owner occupied properties had been substantially understated. Through the foregoing litigation involving the -4-
Trusts at issue in this action or the principal loan sellers to the Trusts (or both), Citibank was informed of specific, systemic and pervasive deficiencies in the Trusts mortgage collateral. 8. Citibank was further informed of pervasive and systemic deficiencies infecting the Trusts collateral through large-scale putback initiatives led by many of the world s largest institutional mortgage investors. These initiatives have targeted Citibank and five other leading sponsors of non-agency RMBS and cover wide swaths of the RMBS market, including entire labels and shelves. These and other certificateholder-led initiatives several of which have yielded multi-billion dollar settlements sought to putback large quantities of loans originated by many of the same lenders that also originated large quantities of the loans sold to the Trusts, including American Home ($5.5 billion of loans sold to the Trusts), and Wells Fargo ($226.8 billion of loans sold to the Trusts). The initiatives additionally identified and sought recovery of losses relating to servicing deficiencies by many of the same major servicers of loans backing the Trusts, including Wells Fargo (original servicer to $8.3 billion of loans sold to the Trusts). 9. Citibank also knew of industrywide abandonment of underwriting guidelines and sound securitization practices because Citibank was itself a major mortgage originator, a major RMBS sponsor, and a major servicer. Indeed, Citibank (or its affiliates) has been named as a defendant in significant RMBS litigation and settlements in its capacity as sponsor and underwriter of Citi-label RMBS filled with loans originated by many of the same originators of loans sold to the Trusts. For example, in February 2011, the largest publicly-held personal property and casualty insurance company in the United States filed suit against Citibank (and its affiliates) in its capacity as originator, sponsor, underwriter, and depositor for trusts underlying $200 million in Citi-label RMBS the insurer had purchased. The complaint alleged that while the insurer was made to believe it was buying highly-rated, safe securities backed by pools of loans -5-
with specifically-represented risk profiles, in fact [Citibank] knew the pools were toxic mixes of loans extended to borrowers who could not afford the properties, and thus were highly likely to default. The complaint further alleged that Citibank knew that underwriting standards for the origination or acquisition of the loans had been systematically ignored, citing among other things, testimony before the Financial Crisis Inquiry Commission ( FCIC ) by a former Chief Underwriter for Citigroup, Inc. that: A decision was made that We re going to have to hold our nose and start buying the stated product if we want to stay in business. Notably, the principal originators of the securitizations there at issue included WaMu, Wells Fargo, American Home, and National City Mortgage, Inc. all significant sellers of loans to the Trusts. 10. Moreover, early this year, Citibank agreed to a $1.125 billion settlement in connection with an investor-led initiative covering repurchase and servicing claims on sixtyeight RMBS trusts sponsored by Citibank from 2005 to 2008. Citibank s binding offer of settlement, which is subject to trustee approval, concerns RMBS backed by pools of mortgages loans which, again, were originated by many of the same lenders that sold large quantities of loans to the Trusts, including American Home ($5.8 billion of loans sold to the Trusts) and Wells Fargo ($226.8 million of loans sold to the Trusts). 11. Finally, as a major player in the RMBS securitization market, Citibank learned of the industrywide servicer violations plaguing the Trusts. Indeed, many of the servicers to the Trusts have faced federal and state regulatory enforcement actions which have led to landmark settlements, including the $25 billion National Mortgage Settlement entered into between forty-nine state attorneys general and some of the Trusts servicers. Notably, without receiving Certificateholder approval, many of these settlement agreements effectively permit the servicers to use trust assets to finance their settlement payments for their own wrongdoing. -6-
12. Indeed, Citibank itself was the target of government investigations and lawsuits regarding its deficient servicing operations. For example, during the fourth quarter of 2010, the Federal Reserve, the Office of the Comptroller of the Currency ( OCC ), the Federal Deposit Insurance Corporation ( FDIC ), and the Office of Thrift Supervision ( OTS ) conducted on-site reviews of the adequacy of controls and governance over servicers foreclosure processes at Citibank. The reviews uncovered significant problems in foreclosure processing at Citibank, including critical weaknesses in [Citibank s] foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party vendors, including foreclosure attorneys. Based on the deficiencies in the review and the risk of additional issues as a result of weak controls and processes, the Federal Reserve initiated formal enforcement actions requiring Citibank to address its pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing. Ultimately, Citibank (and its affiliates) entered into a consent order with the Federal Reserve, which found that it had engaged in unsafe or unsound practices with respect to the manner in which [Citibank] handled various foreclosure and related activities. 13. Under the governing Pooling and Servicing Agreements ( PSAs ), upon knowledge of an Event of Default by a servicer, Citibank is obligated to provide written notice of the default to the servicer. Citibank systematically failed, however, to provide notice to the servicers of their defaults because Citibank did not want to jeopardize its close business relationships with the servicers. Moreover, Citibank, which also acts as a servicer for billions of dollars of other RMBS, has itself engaged in the same improper and illicit servicing activities that plagued the Trusts. Similarly, Citibank originated billions of dollars in loans that have been securitized in other RMBS and that contain pervasive breaches of representations and warranties. -7-
Many of the same entities that act as servicers for the Trusts also service these defective Citibank-originated loans. Thus, Citibank, acting in its own self-interest, refused to provide notice to the servicers of their defaults to avoid scrutiny of its own servicing business and evade liability for its own defective loans. 14. Further, under the PSAs, within sixty to ninety days after the occurrence of an Event of Default, Citibank is obligated to transmit by mail to all Certificateholders notice of each Event of Default known to Citibank, unless the Event of Default has been cured or waived. Although Events of Default occurred and were not and have not been cured or waived, Citibank has similarly failed to provide written notice to the Certificateholders of the Events of Default. Citibank has covered up the Events of Default for several self-interested reasons. Among other things, as noted above, providing notice of the servicers default could jeopardize Citibank s business relationships with the servicers and lead to Citibank s own potential liability in its capacity as an originator, sponsor, and servicer to other RMBS Trusts. Moreover, as discussed in greater detail below, had Citibank provided notice of an Event of Default, it would have greatly increased Citibank s liabilities and duties, but Citibank s compensation under the PSAs would have remained the same. 15. Finally, after the Events of Default, Citibank failed to exercise its rights under the Governing Agreements as a prudent person would, under those circumstances, in the conduct of its own affairs. Citibank did nothing to protect the Trusts and Certificateholders, choosing instead to deliberately ignore the egregious Events of Default for its own benefit and to the detriment of the Trusts. -8-
II. PARTIES A. Plaintiffs 16. Each of the plaintiffs identified below (collectively, the Plaintiffs ) is a Certificateholder in the Trusts as identified in Exhibit 1 attached hereto. Each of the Plaintiffs was a Certificateholder of the respective Trusts at the time of the transactions of which it complains, or interests therein devolved upon it by operation of law in accordance with New York General Obligations Law 13-107. 17. The Plaintiffs hold the economic and beneficial interest in their Certificates and are the true parties in interest. No other party has an economic or beneficial interest in the Plaintiffs Certificates in this matter. 1. AEGON 18. The following plaintiffs are collectively referred to as AEGON. 19. Plaintiff LIICA Re II, Inc. is a corporation organized under the laws of the State of Vermont with its principal place of business in Burlington, Vermont. 20. Plaintiff Monumental Life Insurance Company Modified Separate Account is a corporation organized under the laws of the State of Iowa with its principal place of business in Cedar Rapids, Iowa. 21. Plaintiff Transamerica Life Insurance Company is a corporation organized under the laws of the State of Iowa with its principal place of business in Cedar Rapids, Iowa. 22. Plaintiff Transamerica Premier Life Insurance Company is a corporation organized under the laws of Iowa with its principal place of business at 4333 Edgewood Road NE, Cedar Rapids, Iowa. -9-
2. Kore 23. Plaintiff Kore is a Delaware Limited Partnership with its principal place of business located at 1501 Corporate Drive, Suite 230, Boynton Beach, Florida. Kore is the investment manager to Kore Fixed Income Fund Ltd., a private fund formed under the laws of the Cayman Islands and Sunrise Partners Limited Partnership, a private fund formed under the laws of Delaware (collectively, the Private Funds ). Kore, through the Private Funds, is a Certificateholder in the Trusts identified in Exhibit 1 attached hereto. Kore, through the Private Funds, has been a Certificateholder of these Trusts at the time of the transactions of which it complains, or its interests therein devolved upon it by operation of law in accordance with New York General Obligations Law 13 107. 3. PIMCO 24. The following plaintiffs are collectively referred to as PIMCO. 25. Plaintiff Fixed Income SHares: Series M is a Massachusetts business trust. 26. Plaintiff LVS II LLC is a Delaware limited liability company. 27. Plaintiff PCM Fund, Inc. is a corporation existing under the laws of Maryland, with its principal place of business located at 1345 Avenue of the Americas, New York, New York. 28. Plaintiff PIMCO Absolute Return Strategy II Master Fund LDC is a limited duration company existing under the laws of the Cayman Islands. 29. Plaintiff PIMCO Absolute Return Strategy III Master Fund LDC is a limited duration company existing under the laws of the Cayman Islands. 30. Plaintiff PIMCO Absolute Return Strategy III Overlay Master Fund Ltd. is a limited partnership existing under the laws of the Cayman Islands. -10-
31. Plaintiff PIMCO Absolute Return Strategy IV Master Fund LDC is a limited duration company existing under the laws of the Cayman Islands. 32. Plaintiff PIMCO Absolute Return Strategy V Master Fund LDC is a limited duration company existing under the laws of the Cayman Islands. 33. Plaintiff PIMCO Bermuda Trust: PIMCO Bermuda Foreign Low Duration Fund is a business trust existing under the laws of the Cayman Islands. 34. Plaintiff PIMCO Bermuda Trust: PIMCO Bermuda U.S. Low Duration Fund is a business trust existing under the laws of the Cayman Islands. 35. Plaintiff PIMCO Cayman SPC Limited: PIMCO Cayman Japan CorePLUS Segregated Portfolio is a Cayman Islands business trust. 36. Plaintiff PIMCO Cayman Trust: PIMCO Cayman Global Advantage Bond Fund is a business trust existing under the laws of the Cayman Islands. 37. Plaintiff PIMCO Cayman Trust: PIMCO Cayman Global Aggregate Ex-Japan (Yen-Hedged) Bond Fund II is a Cayman Islands business trust. 38. Plaintiff PIMCO Cayman Trust: PIMCO Cayman Global Aggregate Ex-Japan (Yen-Hedged) Income Fund is a business trust existing under the laws of the Cayman Islands. 39. Plaintiff PIMCO Cayman Trust: PIMCO Cayman Global Aggregate Ex-Japan Bond Fund is a Cayman Islands business trust. 40. Plaintiff PIMCO Cayman Trust: PIMCO Cayman Global Bond (NZD-Hedged) Fund is a business trust existing under the laws of the Cayman Islands. 41. Plaintiff PIMCO Dynamic Credit Income Fund is a business trust existing under the laws of Massachusetts. -11-
42. Plaintiff PIMCO ETF Trust: PIMCO Total Return Active Exchange-Traded Fund is a statutory trust existing under the laws of Delaware. 43. Plaintiff PIMCO Funds: Global Investors Series plc, Diversified Income Fund is a Cayman Islands business trust. 44. Plaintiff PIMCO Funds: Global Investors Series plc, Global Bond Fund is a Cayman Islands business trust. 45. Plaintiff PIMCO Funds: Global Investors Series plc, Global Investment Grade Credit Fund is a Cayman Islands business trust. 46. Plaintiff PIMCO Funds: Global Investors Series plc, Income Fund is a corporation organized under the laws of Ireland. 47. Plaintiff PIMCO Funds: Global Investors Series plc, PIMCO Credit Absolute Return Fund is a Cayman Islands business trust. 48. Plaintiff PIMCO Funds: Global Investors Series plc, Unconstrained Bond Fund is a corporation organized under the laws of Ireland. 49. Plaintiff PIMCO Funds: PIMCO CommoditiesPLUS Strategy Fund is a business trust existing under the laws of Massachusetts. 50. Plaintiff PIMCO Funds: PIMCO Commodity Real Return Strategy Fund is a Cayman Islands business trust. 51. Plaintiff PIMCO Funds: PIMCO Credit Absolute Return Fund is a business trust existing under the laws of Massachusetts. 52. Plaintiff PIMCO Funds: PIMCO Diversified Income Fund is a business trust existing under the laws of Massachusetts. -12-
53. Plaintiff PIMCO Funds: PIMCO Floating Income Fund is a business trust existing under the laws of Massachusetts. 54. Plaintiff PIMCO Funds: PIMCO Foreign Bond Fund (Unhedged) is a business trust existing under the laws of Massachusetts. 55. Plaintiff PIMCO Funds: PIMCO Global Advantage Strategy Bond Fund is a business trust existing under the laws of Massachusetts. 56. Plaintiff PIMCO Funds: PIMCO Global Bond Fund (Unhedged) is a business trust existing under the laws of Massachusetts. 57. Plaintiff PIMCO Funds: PIMCO Income Fund is a business trust existing under the laws of Massachusetts. 58. Plaintiff PIMCO Funds: PIMCO International StocksPLUS AR Strategy Fund (U.S. Dollar-Hedged) is a business trust existing under the laws of Massachusetts. 59. Plaintiff PIMCO Funds: PIMCO Investment Grade Corporate Bond Fund is a business trust existing under the laws of Massachusetts. 60. Plaintiff PIMCO Funds: PIMCO Low Duration Fund is a Massachusetts business trust. 61. Plaintiff PIMCO Funds: PIMCO Low Duration Fund II is a Massachusetts business trust. 62. Plaintiff PIMCO Funds: PIMCO Low Duration Fund III is a Massachusetts business trust. 63. Plaintiff PIMCO Funds: PIMCO Real Return Fund is a Massachusetts business trust. -13-
64. Plaintiff PIMCO Funds: PIMCO Short-Term Fund is a Massachusetts business trust. 65. Plaintiff PIMCO Funds: PIMCO Total Return Fund is a Massachusetts business trust. 66. Plaintiff PIMCO Funds: PIMCO Unconstrained Bond Fund is a Massachusetts business trust. 67. Plaintiff PIMCO Funds: PIMCO Worldwide Fundamental Advantage AR Strategy Fund is a Massachusetts business trust. 68. Plaintiff PIMCO Funds: Private Account Portfolio Series Emerging Markets Portfolio is a Massachusetts business trust. 69. Plaintiff PIMCO Funds: Private Account Portfolio Series International Portfolio is a Massachusetts business trust. 70. Plaintiff PIMCO Funds: Private Account Portfolio Series Mortgage Portfolio is a Massachusetts business trust. 71. Plaintiff PIMCO Funds: Private Account Portfolio Series Short-Term Portfolio is a Massachusetts business trust. 72. Plaintiff PIMCO Funds: Private Account Portfolio Series U.S. Government Sector Portfolio is a Massachusetts business trust. 73. Plaintiff PIMCO Multi-Sector Strategy Fund Ltd. is a Cayman Islands Exempted Company. 74. Plaintiff PIMCO Offshore Funds - PIMCO Absolute Return Strategy IV efund is a Cayman Islands business trust. -14-
75. Plaintiff PIMCO Variable Insurance Trust: PIMCO Global Advantage Strategy Bond Portfolio is a Delaware business trust. 76. Plaintiff PIMCO Variable Insurance Trust: PIMCO Global Bond Portfolio (Unhedged) is a Delaware business trust. 77. Plaintiff PIMCO Variable Insurance Trust: PIMCO Low Duration Portfolio is a Delaware business trust. 4. Prudential 78. The following plaintiffs are collectively referred to as Prudential. 79. Plaintiff Prudential Bank & Trust, FSB ( PB&T ), is a federally chartered bank with its principal place of business at 280 Trumbull Street, Hartford, Connecticut 06103. PB&T is a subsidiary of Prudential IBH Holdco., Inc., and ultimately Prudential Financial, Inc. 80. Plaintiff Prudential Retirement Insurance and Annuity Company ( PRIAC ) is an insurance company formed under the laws of Connecticut, with its principal place of business in Hartford, Connecticut. PRIAC is a wholly owned subsidiary of The Prudential Insurance Company of America, which is owned by Prudential Holdings, LLC, and ultimately by Prudential Financial, Inc. PRIAC established and maintains the following open-end, commingled, insurance company separate accounts: Western Asset: Enhanced Cash, Wellington: Investment Grade Fixed Income, the Core Plus Bond Fund / REAMS Fund, Core Plus Bond Pimco Fund, High Grade Bond Fund / GSAM Fund, North Carolina Fixed Income Fund - JP Morgan Chase and Union Carbide I (collectively, the Separate Accounts ). 81. Plaintiff The Gibraltar Life Insurance Company, Ltd. ( Gibraltar ) is a life insurance company formed under the laws of Japan, with its principal place of business at Prudential Tower 2-13-10, Nagatacho, Chiyoda-ku, Tokyo, Japan 100-0014. Gibraltar is a -15-
wholly owned subsidiary of Prudential Holdings of Japan, Inc., and ultimately Prudential Financial, Inc. 82. Plaintiff The Prudential Series Fund ( PSF ), formerly known as Prudential Series Fund, Inc., is an unincorporated Delaware statutory trust with a principal place of business at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey. PSF is an open-end management investment company registered with the Securities and Exchange Commission. PSF consists of eighteen series funds, including The Prudential Series Fund-Conservative Balanced Portfolio, The Prudential Series Fund-Diversified Bond Portfolio, The Prudential Series Fund-High Yield Portfolio and The Prudential Series Fund-Flexible Managed Portfolio. PSF, through The Prudential Series Fund-Conservative Balanced Portfolio, The Prudential Series Fund-Diversified Bond Portfolio, The Prudential Series Fund-High Yield Portfolio and The Prudential Series Fund-Flexible Managed Portfolio. 5. Sealink 83. Plaintiff Sealink is a company incorporated under the laws of Ireland with the registered address of Sealink Funding Limited, Fourth Floor, 3 George s Dock, IFSC, Dublin 1, Ireland. 6. TIAA 84. The following plaintiffs are collectively referred to as TIAA. 85. Plaintiff CREF Bond Market Account is a Delaware mutual fund with its principal place of business in the State of New York. 86. Plaintiff CREF Social Choice Account is a New York investment company with its principal place of business in the State of New York. -16-
87. Plaintiff TIAA Global Public Investments, MBS LLC, a wholly owned subsidiary of TIAA-CREF Life Insurance Company, is a Delaware limited liability company with its principal place of business in the State of New York. 88. Plaintiff TIAA-CREF Bond Fund is a Delaware mutual fund with its principal place of business in the State of New York. 89. Plaintiff TIAA-CREF Bond Plus Fund is a Delaware mutual fund with its principal place of business in the State of New York. 90. Plaintiff TIAA-CREF Life Insurance Company is a direct wholly-owned subsidiary of Teachers Life Insurance and Annuity Association of America, a legal reserve life insurance company established under the insurance laws of the State of New York. Through its separate accounts (General Pension Act.; TIAA Stable Value; TIAA-CREF Life Ins. GFA; General Acct PA; T-C Life Ins. PA; TIAA Stable Return Annuity), TIAA-CREF Life Insurance Company is a Certificateholder in the Trusts identified in Exhibit 1 attached hereto. TIAA- CREF Life Insurance Company, through its managed accounts, has been a Certificateholder of these Trusts at the time of the transactions of which it complaints, or interests therein devolved upon it by operation of law in accordance with New York General Obligations Law 13-107. B. Defendants 1. Citibank 91. Defendant Citibank, N.A. is a national banking association. It is a wholly owned subsidiary of Citigroup, Inc., a Delaware corporation. Citibank is a member of the FDIC and its principal executive offices are located at 399 Park Avenue, Front 1, New York, New York 10043. 92. Defendant Citibank provided corporate trust services offering a full range of agency, fiduciary, tender and exchange, depositary and escrow services. As of the end of the fourth quarter of 2006, Citibank acted as trustee and/or paying agent on approximately 330-17-
RMBS transactions. Citibank currently serves as trustee for approximately 115 private-label RMBS Trusts established between 2004 and 2008, which have a total original face amount of more than $69.2 billion. 93. During the housing boom of the 2000 s, Defendant Citibank s parent company, Citigroup, Inc., and its various affiliates ( Citigroup ), were a leading participant in the origination and securitization markets for subprime mortgages. Citigroup became a top subprime lender through acquisitions and was consistently ranked among the top twelve subprime lenders in the United States from 2004 to 2007. Citigroup nearly doubled the share of its mortgage business devoted to subprime loans from 10% in 2005 to 19% in 2007, and it also increased the percentage of subprime loans from 10% in 2005 to 19% in 2007, and it also increased the percentage of subprime loans it originated with high-risk features such as low down payments, piggyback second mortgages, stated income mortgages with little or no documentation of the borrowers income, and loans made to investors who intended to flip the houses they purchased. 94. In addition to its origination business, Citigroup was heavily involved in the securitization market for subprime mortgages. Citigroup provided warehouse lines of credit to leading nonbank subprime lenders, including Ameriquest and New Century. Citigroup also purchased large volumes of subprime and Alt-A loans originated by those and other nonbank lenders, and Citigroup packaged those loans into nonprime RMBS that were sold to investors. 2. The Nominal Defendant Trusts 95. Each Trust is named herein as a nominal defendant. Twenty-six of the Trusts are New York common law trusts established under its respective PSA. The remaining trust, AHM 2004-3, is a Delaware statutory trust established under its respective Indenture and Sale Servicing Agreement ( SSA ). All of the Trusts are governed by the substantive laws of the -18-
State of New York, and are subject to the Trust Indenture Act of 1939 (15 U.S.C. 77aaa, et seq.). 96. All of the Governing Agreements are substantially similar, and impose the same duties on Citibank as Trustee to the Trusts and Certificateholders. Accordingly, this Complaint primarily refers to the PSAs when discussing the Trustee s contractual obligations. III. OVERVIEW OF THE TRUSTS 97. The Trusts in this action, identified in the attached Exhibit 1, are twenty-seven New York common law trusts and one Delaware statutory trust, resulting from non-agency residential mortgage-backed securitizations issued between 2004 and 2007, inclusive. The Trusts have a total original principal balance of over $17.4 billion and current balance of over $4.4 billion, as of November 1, 2014. To date, the Trusts have suffered total realized collateral losses of approximately $2.3 billion. Moreover, as a result of defective mortgage collateral and servicer violations, the Trusts have incurred and will incur substantial losses. 98. The Trusts have a high concentration of loans originated by five lenders. Specifically, American Home, WaMu (and related affiliates), SunTrust, Wells Fargo (and affiliates), UBS and Goldman Sachs Mortgage Company (and affiliates) ( Goldman Sachs ) collectively originated over $12.5 billion in loans included in the Trusts, representing nearly 75% of the Trusts original mortgage collateral. 99. The mortgage loans in the Trusts were underwritten and securitized by eight different sponsors and offered to the public in twenty-seven deals. A significant portion of loans was sponsored by five entities. Specifically, approximately $16.7 billion in loans were sold to the Trusts by WaMu, American Home, Lehman (and affiliates), UBS, and Goldman Sachs, representing approximately 96% of the total original face value of the mortgage loans in the Trusts. -19-
100. An overwhelming majority of the Trusts loans is serviced by four entities. Specifically, $16.7 billion in loans are serviced by Wells Fargo, WaMu and Aurora, representing approximately 96% of the total original face value of the mortgage loans in the Trusts. IV. JURISDICTION AND VENUE 101. This Court has federal question jurisdiction over this action pursuant to 28 U.S.C. 1331 for violations of the TIA, and supplemental jurisdiction over the remaining claims. This Court also has jurisdiction over this action pursuant to 28 U.S.C. 1332(d). 102. Venue is proper in this District under 28 U.S.C. 1391(b). V. COMPLIANCE WITH THE NO ACTION CLAUSE IS EXCUSED 103. Compliance with the pre-suit requirements of the Trusts no action clause is excused. For nearly all of the Trusts, the no action clause in the PSA identifies Citibank, as Trustee, as the sole notice party. If the no action clause s pre-suit requirements for these Trusts were to apply, they would require Plaintiffs to demand that Citibank initiate proceedings against itself and to indemnify Citibank for its own liability to the Trusts, an absurd requirement that the parties did not intend. See Cruden v. Bank of New York, 957 F.2d 961, 968 (2d Cir. 1992). 104. Most of the remaining Trusts identify Wells Fargo, in its capacity as Trust Administrator, Securities Administrator or Master Servicer, as a notice party. For these trusts, it would be similarly absurd for Plaintiffs to demand that Wells Fargo bring the instant suit against Citibank because Wells Fargo also suffers from disabling conflicts, and compliance with such a demand would require Wells Fargo to admit to its wrongdoing. In connection with these Trusts, Wells Fargo, in its capacity as Master Servicer or primary servicer, defaulted and continues to default on its obligations to the Trusts and has harmed trust beneficiaries by failing to observe and perform covenants and agreements set forth in the PSAs, including by unreasonably refusing to provide notice of seller breaches of representations and warranties, requiring the sellers to -20-
perform their repurchase obligations and to service and administer the mortgage loans in accordance with applicable law and customary and usual standards of practice of mortgage lenders and loan servicers. Consequently, it would be absurd to demand that Wells Fargo bring claims against Citibank in connection with these Trusts because doing so would require Wells Fargo to allege and prove its own misconduct and liability to the Trusts and may invoke Wells Fargo s indemnity obligations to the Trustee. Likewise, it would be absurd and contravene the parties intentions to require Plaintiffs to indemnify Wells Fargo against the costs, expenses, and liabilities incurred in a suit against Citibank. Moreover, Wells Fargo receives a direct financial benefit from not suing Citibank, because any suit by Wells Fargo against Citibank would expose Wells Fargo s own defaults as Master Servicer or primary servicer, would lead to its termination as servicer to the Trust and loss of servicing fees. The suit would also interfere with Wells Fargo s business relationships with Citibank, including billions of dollars in servicing fees annually from Citibank. For example, Wells Fargo serves as Master Servicer to over 35 RMBS trusts issued between 2004 and 2008 with an original face value of over $34 billion for which Citibank serves as trustee. VI. DERIVATIVE AND DEMAND EXCUSED ALLEGATIONS 105. Plaintiffs bring the claims set forth below derivatively in the right of the Trustee and on behalf of the Trusts. Plaintiffs have the right to bring this suit derivatively under New York law. All of Plaintiffs claims relate to Citibank s breach of common duties owed to the Trusts and Certificateholders through its mismanagement of the Trusts and its failure and unreasonable refusal to act in the best interests of the Trusts, including enforcing the Trusts rights against those who have harmed the Trusts. This is common to all holders of interests in the Trusts, not just Plaintiffs, because all Certificateholders are paid from the cash flows generated by the same pool or pools of mortgages in the Trusts. Accordingly, Plaintiffs claims -21-
concern a purported injury to the Trusts as a whole. See Dallas Cowboys Football Club, Ltd. v. Nat'l Football League Trust, No. 95 Civ. 9426, 1996 WL 601705, at *2-4 (S.D.N.Y. Oct. 18, 1996). 106. The terms of the PSAs are consistent with asserting the claims derivatively, as they specifically provide as follows: no one or more Holders of Certificates shall have any right in any manner whatever by virtue or by availing itself or themselves of any provisions of this Agreement to affect, disturb or prejudice the rights of the Holders of any other of the Certificates, or to obtain or seek to obtain priority over or preference to any other such Holder or to enforce any right under this Agreement, except in the manner herein provided and for the common benefit of all Certificateholders. PSA 12.07 (emphasis added). 107. This is not a collusive action to confer jurisdiction on this Court which it would not otherwise have. 108. Plaintiffs are Certificateholders and have been beneficial owners of RMBS in each of the Trusts during all or a large portion of Citibank s wrongful course of conduct alleged herein. Moreover, under New York General Obligations Law 13-107, the transfer of ownership in the certificates vested in the Plaintiffs the claims or demands alleged herein. 109. Plaintiffs will adequately and fairly represent the interests of the Trusts and their investors in enforcing and prosecuting the rights that form the subject matter of this action. At all relevant times, Plaintiffs have acted equitably and in good faith, without any ulterior motive, and in the belief that the Trusts and Certificateholders are entitled to the relief sought on their behalf. 110. As set forth below, Plaintiffs have not made a demand on Citibank or Wells Fargo to institute this action because such demand would be futile. -22-
111. Any demand on Citibank to institute this action would be futile because the wrongful acts alleged herein were committed by Citibank and Citibank would not agree to sue itself, particularly since it faces claims for losses by the Trusts in excess of $2.3 billion. In addition, since Citibank itself committed the wrongdoing complained of herein, and is accused of negligent and misconduct, it therefore is not disinterested and lacks independence to exercise business judgment. Moreover, Citibank has benefitted from, and continues to benefit from, its wrongdoing as alleged herein, (i.e., its failure to act in the best interest of the Trusts and Certificateholders), as Citibank has maintained and preserved its business relationships with the Sellers and Servicers and thereby continues to derive financial benefits from serving as Trustee to Trusts, and many other RMBS trusts, due to its continuing wrongdoing as alleged herein. 112. Any demand on Wells Fargo to institute this action on behalf of the remaining Trusts in which it is identified as a notice party under the PSAs no action clause also would be futile because, as alleged above, Wells Fargo committed wrongdoing in its capacity as Master Servicer or servicer, and any suit brought by Wells Fargo on behalf of the Trusts would expose Wells Fargo s own defaults as Master Servicer or primary servicer, would lead to its termination as servicer to the Trust and loss of servicing fees and could implicate certain indemnity obligations owed to Citibank. Wells Fargo also has benefitted from, and continues to benefit from, its wrongdoing as alleged herein as it continues to derive financial benefits from serving as Master Servicer or servicer to the Trusts and to many other RMBS trusts for which Citibank acts as Trustee. Accordingly, Wells Fargo is not disinterested and lacks independence to exercise business judgment. -23-
VII. BACKGROUND - THE TRUSTEE S ROLE AS GATEKEEPER IN THE SECURITIZATION PROCESS 113. RMBS provide investors with an interest in the income generated by one or more designated pools of residential mortgages. The securities themselves represent an interest in an issuing trust that holds the designated mortgage pools. The corpus of the trust like the Trusts at issue here consists entirely of the underlying mortgage loans. 114. The TIA requires that a trustee be appointed for all bond issues over $10 million so that the rights of investors are not compromised. In an RMBS transaction, the issuer appoints the trustee, which is the only independent party to the PSAs. Accordingly, the trustee serves the critical role of an independent party with access to all relevant information, including the mortgage loan files. Investors reasonably understand that the trustee is under an affirmative duty to take action to protect the interests of the Trusts and their beneficiaries, the certificateholders. As part of the RMBS transaction, the trustee is assigned all right, title and interest in the underlying mortgage loans. The PSAs require the trustee, or its agent, to take physical possession of the mortgage loans, ensure that each of the mortgage loans was properly conveyed and certify that the documentation for each loan was accurate and complete. 115. The trustee is contractually responsible for the transactions of the issuing trust. The trustee is responsible for administering the trust for the benefit of investors, including guaranteeing that the transactions are administered in accordance with the related documentation, following compliance and performance-related matters, and handling cash and information processing for the investors. The trustee must work closely with the issuer and servicer to protect the welfare of the investors. In contrast to the roles of issuer or servicer, which can be combined, the trustee s sole purpose is to represent the investor and, therefore, the trustee must be an independent entity without any conflicts-of-interest. The PSAs contractually obligate the -24-